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of Florida

IW92-20

COMPETITIVENESS OF FLORIDA AND MEXICAN
FARMERS IN THE TOMATO TRADE:
HOW DOES SUBSIDY REMOVAL AFFECT IT?

The future of fruit and vegetable agriculture looks
pretty dim....Introducing foreign competition without
incr asing demand will mean aoss of U.S. farms ....The
Unite States is losing the competitive race that
determines where its fruits and vegetables come
from....U.S. government policy is to encourage less
developed nations Mexico, the Caribbean, Andean
nations, and others to export fruits and vegetables to
the United States....The country is faced with a trade
negotiation with Mexico to be conducted by an
administration that just doesn't seem to appreciate the
problem of comparative competitiveness and how it is
affected by domestic policies....They [domestic policies]
impose economic burdens that inevitably result in higher
costs. And that means more imports and/or reduced
availability of fruits and vegetables because of the
market driven nature of the industry (Bouis, 1991).

The source of the Florida farmers' apprehension seems to

lie not in their inefficiency relative to Mexican farmers but

in the additional financial burdens resulting from policy

interventions such as: environmental regulations, wage rates,
i

costs of credit, and above all, governmental protection in the

form of tariffs and subsidies. In other words, Florida

farmers seem to believe that even though they are efficient

producers of tomatoes, they may not be able to compete with

Mexican tomato farmers because Mexican farmers are somewhat

protected by subsidies whereas US farmers are not. How

"competitive" would Mexican farmers be without subsidies, even

small ones? This paper attempts to answer that question.

The term "competitiveness" does not have a definition in

neoclassical economic theory; it is a political concept.

Economists' perception of competitiveness is that it is the

result of the combined effect of market (usually policy-

induced) distortions and comparative advantage. "Comparative

advantage" is an economic concept, concerned with trade and

optimal welfare in an undistorted world. Competitiveness, on

the other hand, relates to long-term survival (Thurow, 1992).

If a firm cannot survive by selling at the going price, it is

not regarded as competitive. If it is able to survive because

it is able to increase its market share at the going price, it

is regarded as being more competitive. And economic

competition between nations as well as firms is going to be

the name of the game in the 21st century (Thurow, 1992:22).

Japanese firms, according to Thurow (1992:125,149) are

competitive because they don't maximize profit but do maximize

long run survival subject to a profitability "greater than

zero" constraint. American firms lose market share to them

because they are too constrained by the short-term goal of

maximizing profits; in the case of the consumer electronics

industry, for example, they left the market after being

consistently undercut by the low-priced and low-profit

Japanese.

An increase in competitiveness of a firm, however, does

not necessarily imply an increase in national welfare in the

short run. This is so because a firm may be inefficient in

terms of use of inputs, but may be rendered competitive

through government support (including subsidies). Conversely,

a firm may be efficient in terms of use of inputs, but may be

rendered uncompetitive because of costs resulting from

government intervention. In international trade, it is the

economic cost of production plus the additional economic costs

to get the commodity to the foreign buyer that determines

competitiveness. Hence, in order to properly assess

competitiveness, one needs to take into account policy

interventions (e.g., taxes, subsidies) that influence the

factor prices faced by producers (Sharples, 1990).

Proper assessment of competitiveness becomes especially

important in the context of international trade in

agricultural products. Available evidence suggests that many

countries pursue a host of agricultural and trade policies

which distort the working of the free market and which very

often alter the nature of trade. While such policies are

generally aimed at protecting their producers from the world

market, they are also instituted to enhance competitiveness in

the world market. Indeed, public policy-induced distortions

can and do impact competitive performance to such an extent

that actual trade patterns significantly diverge from what

they would have been on the basis of comparative advantage

alone (Menzie and Prentice, 1987).

Having said all this, we now return to the issue of

competitiveness of Florida and Mexico farmers in tomato trade.

To begin with, we provide a brief overview of the fresh winter

vegetable industry in Florida and Mexico in the hope that this

will serve as a useful backdrop for the discussion of

competitiveness in the context of NAFTA.

The fresh winter vegetable industry consists of six

vegetables, namely tomatoes, bell peppers, squash, cucumbers,

eggplant and green beans. While tomatoes are but one of the

many vegetables produced in Florida, they are by far the most

economically important and have been at the center of debate

over the impacts of NAFTA. During the 1990/91 season, fresh

tomatoes produced in Florida under the Federal Marketing Order

966 amounted to over 1.38 billion pounds with an FOB value of

over $515.7 million. On average, tomatoes annually account

for more than one third of the total value of all vegetables

produced in Florida. Competition is also the greatest in the

case of tomatoes (Taylor, 1992).

Florida and West Mexico supply about two-thirds of all

the fresh tomatoes consumed in the United States from October

to July. California, Texas, South Carolina, and several minor

supply areas producing late in the fall and again in the

spring supply the remaining one-third. The main competition,

however, is between Florida and the State of Sinaloa in

Mexico. Although Florida primarily serves the eastern U.S.

and Mexico the western U.S., the two compete in the midwestern

U.S., with the final outcome in terms of market share

depending on their relative competitiveness. Florida has

higher market share from October to December and May to July,

while Mexico has higher market share from January to April.

As Florida periodically suffers from freeze spells during

January-April, per unit production costs rise, as a result of

which Florida's market share suffers a decline.

Mexico has shipped fresh tomatoes to the United States

for many years. Starting with 100 million pounds in 1957/58,

Mexican tomato exports to the United States increased sharply

to over 800 million pounds in 1978/79, with a consequent

decline in Florida's market share. This sustained expansion

of Mexican tomato exports and the consequent loss of Florida's

share in the U.S. market induced Florida's tomato producers to

resort to legal means (the market order regulation of January

1969) and political pressure (the dumping charge of October

1978) to seek protection against the Mexican producers.

Fresh fruits and vegetables imported into the U.S. have

been subject to a tariff since 1930. The tariff on fresh

tomatoes imported from Mexico has remained unchanged since

1951, when the rate was set at 1.5 cents/pound for tomatoes

imported between November 15 and the last day of the following

February, and 2.1 cents/pound for those imported during the

remaining periods. The duty had the effect of raising the

cost of supplying tomatoes to markets in the United States,

but this effect has gradually disappeared over time: the duty

added 23 per cent to the costs of supplying tomatoes in

1951/52, 20 per cent in 1967/68, 12 per cent in 1973/74, 10

per cent in 1978/79 (Zepp, 1981) and a mere 6 per cent in

1990/91.

The duty enabled the Florida tomato farmers to be

competitive in selling mature green tomatoes until 1972/73.

But as regards the vine ripe tomatoes, Mexican farmers held a

cost advantage over Florida farmers even with the imposition

of the duty. In other words, since 1973/74 Mexican producers

have held a total cost advantage over their Florida

counterparts in both vine ripe and mature green tomatoes even

with the imposition of the import duty. Implementation of the

proposed free trade agreement between Mexico and the United

States will result in a removal of the tariff currently in

place on Mexican tomato imports and thereby make Florida

farmers, in their eyes, less competitive still.

2. ANALYSIS OF COSTS OF PRODUCTION

What do the cost of production data say about this issue?

Several studies analyzing the costs of production and

competitiveness between Florida and Mexico have been done for

the fresh winter vegetable industry. The first study was done

by Fliginger et.al. in 1969. They found that the total cost

of producing vine-ripe tomatoes in Mexico was about two-fifths

that of Florida, with the ratio being more or less for

individual production inputs. Marketing costs for tomatoes

from the farm in Mexico to shipping points on the U.S. side of

the border were higher than from the farm in Florida to

shipping points in Florida, but the total cost involved in

deliveries to Chicago was about even for both areas. Mexico

thus had a slight cost advantage in delivering to markets in

the western portion of the U.S., and Florida had a slight

advantage in delivering to markets east of Chicago. The study

also found that given its advantage in cost of production and

climate for winter production, Mexico would probably continue

to increase its exports of vine-ripe tomatoes to the U.S. and

Florida production of vine-ripe tomatoes during the winter

season probably would continue to decline. Florida, however,

could continue to dominate and retain a stronger competitive

position for mature-green tomatoes.

Zepp and Simmons conducted another study into the issue

of competitiveness in 1979. They found that Florida appeared

to have a net competitive advantage (total of the cost

advantage plus the FOB price advantage) in tomato production

and that the greatest comparative advantage occurred in the

spring. Future competition between Florida and Mexico would

be most intense during the midwinter (December through April)

when the southern areas of Mexico were in full production. A

continuation of the higher rate of input price inflation in

Mexico than in the U.S. would enhance Florida's cost

competitive advantage in tomatoes during these months, and

would probably permit Florida growers to enlarge their share

of the midwinter market. They also found that as Mexico's

rural wage advantage diminished, Mexican producers may try to

hold down labor costs by adopting new practices such as

harvesting more tomatoes as mature greens or using plastic

mulch. Year-to-year variation in market shares would still

occur as unusually good or bad weather conditions in one area

or the other affected that area's production.

Another study was done by Buckley et. al. in 1986 to

assess the cost and price advantages of producing the six

winter fresh vegetables in Florida and the West Mexico state

of Sinaloa. They found that Sinaloan growers could produce

winter fresh tomatoes more cheaply than Florida growers. But

import and export fees at the U.S. border increased total

costs for Sinaloan producers beyond total Florida costs. Any

major reduction in border fees on vegetables could shift the

cost competitive advantage for all vegetables to the Sinaloan

growers. They also found that Sinaloan producers would ship

vegetables to the United States as long as prices remained

high enough to cover duties and transportation costs in

addition to production costs. Labor was the highest of the

input costs which had been generally increasing since 1978 in

both countries, but Mexican wage rates in 1983 were 11 percent

of those paid in Florida. Fertilizer and imported chemicals,

cartons, and seeds were expensive for Sinaloan producers while

land rent was a significant cost for Florida's producers, due

mainly to urbanization and economic pressure to divert land to

higher paying uses.

The latest study has been done by Taylor in 1992. He

finds that as the current tariffs on fresh tomatoes have not

represented a significant trade barrier for some time, the

removal of tariffs is not likely to significantly alter the

forces that have driven competition in the industry.

According to him, the reason for the increase in the Florida

tomato industry's shipments to the U.S. domestic winter market

rests in the industry's impressive ability to improve

productivity and not in the existence of tariffs or other

forms of protection.

It is quite apparent from the above review of literature

that all comparisons for assessing competitiveness have been

done ignoring subsidies, even though it is common knowledge

that government policies can and do affect competitiveness by

altering (decreasing or increasing) costs of production for

domestic producers via subsidies and/or taxes in input and

output prices that might change the true picture of

competitiveness. To properly assess competitiveness, an

effort must be made to look at what costs would be, given

subsidy removal, such that both sides have an equal playing

field!

Where might subsidies enter into costs of production?

Table 1 gives the data on financial costs of various inputs

and their respective weight in the total preharvest cost of

producing one carton of tomatoes in Florida and Mexico for

1990/91 (the latest year for which data are available).

Adjustments have been made to account for the substantial

yield differences between the two countries in order to make

the data comparable. As can be seen from the table, the

biggest contributor to the cost of production- for both

countries is the item called "Miscellaneous and Overheads".

This item, accounting for nearly 25% of the costs in both the

countries, includes things such as paint, plastic mulch,

plastic string, replacement stakes, and scouting.

Labor is the second largest cost category, accounting for

approximately 18% of the total costs of production. It is

interesting to note that even though wage rates in Mexico are

substantially lower than those in Florida, the total wage bill

in terms of its weight is higher in Mexico. One explanation

that could be offered for this is that Mexican tomato

production is extremely labor intensive while it is

capital intensive in Florida. This explanation is further

substantiated by the fact that machinery accounts for 17.25%

of the costs in Florida, whereas it accounts for only 6.5%

in Mexico. On the other hand, interest contributes 15% to

Mexican production costs while it contributes only 3.5% to

Florida costs. The third major cost of production thus

differs in the two countries.

Chemicals, consisting of bactericide, fumigant,

fungicide, herbicide, insecticide and surfactant, are the

fourth largest group contributing to costs of production,

accounting for 16.5% in Florida and 10.9% in Mexico. This is

not surprising, but the fact that Florida costs are greater

than Mexico's costs is surprising given Mexico's reported

disregard for United States Environmental Protection Agency

(US EPA) standards.

Table 1. Comparative Costs of Production for Tomatoes in
Sinaloa and Florida, 1990/91.

Bacha, Edmar L., "Latin America's Economic Stagnation:
Domestic and External Factors." Paper prepared for the
Conference on Comparative Development Experiences in Asia and
Latin America, East West Center/ University of Hawaii,
Honolulu, April 20-22, 1988.

Bouis, Frank, "Social Concerns When Regulating the Fruit and
Vegetable Industry" Address at the Look Through The '90s
Workshop sponsored by The S-222 Regional Research Committee
and Farm Foundation, June 1991.